ANALYSIS: View from the City

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View from the City: the X-factor

Article contributed by Bert van Leeuwen, managing director, aviation research DVB Bank

Somehow the letter "X" seems to have some strange fascination. "X" seems to hold a certain promise of an unknown but undoubtedly wonderful thing. X-men are supposed to have supernatural powers, some including X-ray vision. In the X-Factor television show (which of course only my daughters watch) a jury is looking for singers that have this difficult to define element - the X-factor - that will allow them to score hit after hit. What the impact could be of a "XXX-factor" we probably leave to the imagination of the reader. In aviation we all know the famous "X-planes", the "X" simply indicated these were (secret) experimental aircraft. However the speed records set by planes like the Bell X-1 and later the black X-15 plus probably the secrecy surrounding these planes, gave them something "xtra", something mysterious and fascinating. In commercial aviation we may soon witness another interesting battle, this time involving the new twin-aisle "X-planes".

The competitive situation in the single aisle segment is becoming a lot clearer now, although both the Airbus A320Neo and the Boeing 737 Max still need to prove themselves capable of fulfilling all the claimed advantages in reality. The same goes for their powerplants, Pratt & Whitney's PW1000G Geared Turbofan and CFMI's LEAP-1A and -1B. Both aircraft programmes however have in the meantime gathered an impressive number of orders, indicating that the airlines' fleet-planners, the guys and girls that should really know, believe the new narrow-bodies will be OK. For an investor or financier it seems that - similar to the current market equilibrium between the current A320 and the 737NG (both names will need to be revised when Neo and Max enter service, it seems), one can't go terribly wrong selecting either of the two types.

In the twin-aisle market - or apparently in the US now less p.c. "widebody" - segment, thing are more complicated and it seems this situation will continue for the foreseeable future. While not all details are known yet, Airbus and Boeing are pitching new "X-planes" against each-other, the A350XWB that was just rolled-out , versus the not yet officially launched 777X and its smaller stable-mate, the 787-10X. While Toulouse and Seattle will not agree, the A320 and 737 are fairly similar aircraft - to us, financial types - and while their new engines are very different, the end result in terms of fuel-efficiency should not be dissimilar, at least on paper. The approach to the twin-aisle market from Toulouse however is very different from the way things are seen in Seattle. Let's start with a bit of history. Boeing kicked of the "twin aisle" concept in the 1960's with the groundbreaking "747". Lockheed and Douglas jumped on the bandwagon with their slightly smaller "trijets" the L1011 and DC-10. For Lockheed the L1011 spelled their exit from the commercial jet market. (McDonnell) Douglas managed to upgrade the DC-10 to become the MD-11, but further attempts to launch an MD-12 failed, both as a double-decker plane very similar to the current A380 as well as a less ambitious simple stretch of the MD-11. The - at the time - new Airbus-consortium in the meantime had developed a shorthaul twin aisle people-mover, the A300, later followed by the lower capacity but longer range A310. With the A300, Airbus introduced the concept of a twin-aisle aircraft powered by only two engines. Already in the early days of the twin-aisle aircraft we see the dilemma. How many passengers should the plane carry and what should be the maximum range ? Behind this payload/range question another one pops up: what engines and how many should be used? The initial 747 was a long-haul aircraft for its days. The initial versions of the L1011 (-1 and -50) and the DC-10 (-10) were relatively short-haul machines. Later the range of the planes was upgraded to become the shorter-bodied but longer haul L1011-500 and the more successful DC-10-30 and -40 models. Long-haul in those days meaning "transatlantic".

While the initial A300 twin-jets had some success, Boeing's answer in the form of the long-haul medium twin-aisle 767-300ER proved a breakthrough and the 767 became a very popular plane, especially on transatlantic routes. Airbus' answer was a combination of a more modern short-to-medium haul A330 "twin" and a long-haul A340 "quad". While the "quad" eventually proved to be less successful, especially from an investor of financier's perspective (anybody interested in a nice A340-600?) the A330 became a big success, especially after Airbus introduced the longer range -200 and - even better - the high gross weight (=longer range) A330-300 model. The A330-300 high gross weight (HGW) is still a fairly unique aircraft as it is optimized for relatively short missions, compared to almost all other widebodies on the drawing board.

So, where are we now ? Boeing lost significant market share in the 767 market segment to the A330. Several attempts to kill the plane from Toulouse, such as the less ambitious 767-400ER and the radical Sonic Cruiser were rejected by the market and it took several years to develop another radical plane that was up to the challenge. This plane, the 787 can be called the real answer to the A330. Now this is where it becomes interesting. Boeing decided to launch the 787 aimed at the lower capacity end of the long haul twin aisle market, being very happy with the position of their 777-family at the higher end of the medium wide-body market (the 777 effectively having killed the A340). In turn, as an answer to the 787, Airbus decided to launch their all new X-plane family, the exclusively Rolls Royce powered A350XWB (Xtra Wide Body). As we know, the A350 comes in three versions, the smaller -800 aimed at the 787-8 and 787-9, the A350-900 positioned slightly above the 787-9 or the 777-200ER and the large A350-1000 aimed directly at the 777-300ER. From the outset this looked like a very broad range to cover with one family but it is too early to draw any conclusions. For the time being and purely judging by the order volume, it looks like the A350-800 at best will be a niche aircraft, maybe a version that would be best off following the 787-3 into history books. The A350-900 looks like the best-seller of the family and is probably the optimal aircraft. While initially a slow mover, in recent months the A350-1000 seems to be gaining more traction.

While the 777-300ER - together with the A330-300 - is still the darling widebody amongst the investor community, Boeing is reportedly preparing two new designs that actually may replace both of these types and be the answer to the A350 threat. Rumour has it that maybe as soon as the Paris airshow in June a new version of the 787, the 787-10X may be launched. A high capacity version of the 787 with - by today's standards - a modest range but excellent fuel efficiency. The 787-10X seems the only new widebody optimized for the medium haul market, currently dominated by the A330-300. The other new design on the Boeing drawing board reportedly is the 777X, rumored to be the highest capacity twin engined wide-body in the market, bridging the gap to the mega-planes A380 and 747-8I.

So as an investor, lessor or financier and even as an airline, on which plane should you bet? Continue investing in the A330-300 or the 777-300ER, both by any standard still excellent aircraft? Is the 787-8 or -9 the plane to select or will these - in a surprise move - be eclipsed by the A350-800 or maybe the A350-900? How about the all new Rolls-Royce powered A350-1000? Will this plane stay as it is or will we see another permutation (engines?) that will further enhance its performance? Or will the winner be the new GE-powered 777X? The engineers in Seattle have had ample opportunity to benchmark their new product against anything that's been announced by their competitor, so why not?

With all these new widebody designs succeeding each other in a rapid pace, it is not easy to pick winners and losers. What can be concluded is that this market segment is not for the faint hearted and as some aerospace banks have recently experienced, if your money is in the losing design, the result can be extremely painful. From an aviation market researcher it is of course expected that he or she has a clear opinion about future winners and losers and to be honest, the picture is already getting a little clearer. Which plane will be the winner? We have some ideas, but as nobody wants to upset any of the good friends in Seattle or Toulouse, the only View from the City I can share is, that the winner will be the plane with the highest X-factor!